How Long Is a Letter of Intent Good for Mutual Funds?

A Letter of Intent (LOI) in mutual funds is a formal declaration by an investor to purchase a specified dollar amount of shares over a defined period. This commitment allows the investor to qualify for reduced sales charges, known as breakpoint discounts, on their mutual fund investments. An LOI enables investors to access lower sales charges typically reserved for larger, lump-sum investments, even if purchases are made incrementally over time.

Understanding the Letter of Intent Period

A Letter of Intent for mutual funds is typically valid for 13 months. This timeframe comprises 12 months for the investment commitment plus an additional one-month grace period. The LOI period generally begins on the date the investor signs the document or on the date of their initial investment that triggers the LOI. However, some mutual fund companies allow an LOI to be backdated up to 90 days to include previous purchases, which can help an investor immediately qualify for a breakpoint discount on recent transactions.

Despite being a formal agreement, a mutual fund LOI is generally considered non-binding regarding the investor’s obligation to complete the full investment. The agreement serves as a framework for the mutual fund company to apply breakpoint discounts based on the investor’s expressed intent. It allows the investor to benefit from lower sales charges from the outset, even if the total committed amount has not yet been invested.

Fulfilling the Letter of Intent Terms

When an investor meets the investment target outlined in their Letter of Intent within the 13-month period, they realize the benefits of the agreement. Upon reaching the committed investment amount, the mutual fund company applies the lower sales charge, or breakpoint discount, to all purchases made during the LOI period. This includes the initial investment that prompted the LOI and any subsequent investments made over the 13 months. The discount reduces the upfront sales load paid on Class A shares, which can lead to cost savings for the investor.

The mutual fund company typically recalibrates the sales charges for all eligible purchases, ensuring the investor receives the most favorable rate corresponding to their achieved investment level. These discounts are often outlined in the fund’s prospectus, detailing the specific investment thresholds at which different sales charge reductions become available.

Adjustments for Unfulfilled Letters of Intent

If an investor does not meet the committed investment amount within the 13-month LOI period, the mutual fund company will adjust the sales charges retroactively. This adjustment occurs because the initial breakpoint discount was granted based on the investor’s stated intention, which was not fulfilled. The fund company recalculates the sales charges based on the actual amount invested by the end of the LOI term.

To recover the difference between the discounted sales charge initially applied and the higher sales charge that should have been paid, the mutual fund company typically liquidates shares from the investor’s account. Often, a small percentage of the initial purchase, such as 5%, is held in an escrow account specifically for this purpose, serving as collateral. The fund company will sell enough shares from this escrow, or directly from the investor’s account, to cover the unpaid sales charge.